AUD/USD bears ready to engage below 0.7110

• AUD/USD corrects but the focus is on the downside.
• There is a risk of a break below 0.7110 for the days ahead. 
• Coronavirus is driving risk sentiment while Fed speakers will be keenly watched.

AUD/USD is trading at 0.7130 and between a range of 0.7159 and 0.7113 as the price corrects from daily lows. However, the recent news cycle around the focus on the Omicron variant suggests that mobility divergence and reopening strategies will shift back on the radar screen for AUD traders this week as cases are detected locally. This leaves a downside bias on the higher-yielding commodity currencies. 

Australia has already paused plans to reopen its borders to some foreign nationals amid fears over the new Covid variant. The nation was due to allow vaccinated skilled migrants and international students entry from 1 December. But Prime Minister Scott Morrison said a delay of a fortnight was "necessary" following Omicron's discovery.  However, Australia, which has so far found five Omicron infections among travellers arriving in the country, has not announced rolling back any of the restrictions it had already eased earlier this month.

The omicron variant has done little to impact Fed tightening expectations so far, but it is bound to affect consumer confidence which has been known to impact the US dollar at times of despair. Nevertheless,  sentiment has been helped by the WHO; while urging caution, the organization noted that symptoms linked to the new strain so far have been mild.  Additionally, Moderna added to the positive sentiment by predicting it would have a modified vaccine ready by early 2022. As a consequence, global equity markets are higher, as are global bond yields. The US ten year yield is up 3.31% and that is helping the greenback to recover. 

After two straight down days, DXY is trading higher near 96.445 the high for the day so far after finding support near 96.  Forex traders will be keeping an eye out for another test of last week’s high near 97 and then the June 2020 high near 97.802 will be in focus. In this regard, the bias is tilted to the downside for AUD/USD and for a continuation below daily support near 0.7110. This, however, will depend upon the Federal Reserve's tightening expectations.

Central bank speak is key

This makes Fed speak high up on the watchlist for the week ahead where we will hear from Fed’s John Williams, chairman Jerome Powell, and Michelle Bowman. Last Friday, Raphael Bostic played down the risk of the omicron variant. He said that is hopeful that the momentum of the US economy will carry it through the next wave of the coronavirus pandemic and that he remains open to accelerating the pace of the central bank's bond taper. 

If the new Omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the Delta variant, Bostic said. "We have a lot of momentum in the economy right now," Bostic said during an interview with Fox News, citing strong jobs growth. "And that momentum, I'm hopeful, will be able to carry us through this next wave, however it turns out."

However, ''the added uncertainty is likely to keep the bar fairly high to a faster taper,'' analysts at Brown Brothers Harriman argued. ''Odds of Q2 liftoff have risen back to nearly two thirds, which we think is way too aggressive.  That said, we believe that the monetary policy outlook continues to favour the dollar over the euro, yen, and Swiss franc.  None of those central banks are likely to hike rates until 2023 at the earliest and so the 2-year yield differentials should continue to move back in the dollar’s favour this week after plunging last week.'

It is worth noting that the Reserve Banks of New Zealand hase also downplayed omicron risks.  The analysts at BBH noted that ''Chief Economist Ha said that the new variant would have to have a dramatic economic impact to prevent the bank from continuing to hike interest rates.  He added that the bank would have hiked last week even if omicron was known then, stressing it’s not the same as August when RBNZ delayed a hike due to a just-announced lockdown.''

Given the divergence between the Reserve Bank of Australia to that of the Fed and RBNZ and also considering how fluid of a situation this new variant is, the uncertainty will be a weight on both AIUD/NZD and AUD/USD/ AUD/JPY is also regarded as the forex market's risk barometer due to the Aussie's high beta nature and the yen's safe-haven qualities, so this cross is also biased tot he downside.